States Challenge Federal Contractor DEI Executive Order

Nineteen states and the District of Columbia have filed a lawsuit challenging the federal government’s rollout of Executive Order (EO) 14398, “Addressing DEI Discrimination by Federal Contractors.” The coalition of plaintiff states challenges the EO and federal agency actions taken to implement what they allege are unclear requirements across new and existing contracts. Filed on June 10, 2026, the complaint names the United States, the Federal Acquisition Regulatory Council (FAR Council), and numerous federal agencies and agency officials as defendants.

EO 14398, issued March 26, 2026, directs agencies to add a new clause to federal contracts and “contract-like instruments,” including subcontracts. The clause prohibits contractors from engaging in “racially discriminatory DEI activities,” defined as disparate treatment based on race or ethnicity in recruitment, employment, contracting, program participation, or allocation or deployment of an entity’s resources. It also requires contractors to include flow-down clauses in subcontracts, report known or reasonably knowable subcontractor conduct that may violate the clause, and acknowledge compliance as material to payment decisions for purposes of the False Claims Act.

The plaintiffs allege that the contract term is unclear and does not provide sufficient explanation of what it prohibits. The definition of “racially discriminatory DEI activities” echoes existing prohibitions but neither the EO nor implementing actions explain how the new term differs from existing law, EO 11246 (in effect for 60 years), or EO 14173 (issued in January 2025). They allege the lack of clarity also extends to contractors’ obligation to report subcontractor conduct that “may” violate the clause. The states also challenge the agencies’ treatment of prior federal contractor rules, alleging the agencies did not adequately address the shift from requirements that had applied under the now-rescinded EO 11246.

The lawsuit also raises procedural and statutory challenges under the Administrative Procedure Act and federal procurement laws, alleging the FAR Council imposed contract terms with significant external effects without following required notice-and-comment procedures. In support, the complaint points to an April 17, 2026, implementation memorandum in which the FAR Council directed agencies to use the clause in new contracts beginning April 24, 2026, update class deviations concerning the implementation of the clause by April 27, 2026, and make every effort to add the clause to existing contracts by July 24, 2026.

The states claim the new terms adversely impact them because they regularly perform federal contracts and subcontracts through state agencies and instrumentalities, including universities, with collective contracts worth billions of dollars annually. In their view, the unclear terms impose significant compliance challenges, costs, and burdens.

The case, which was filed in the U.S. District Court for the District of Maryland, remains pending. It is also not the only pending litigation involving EO 14398. In the higher education context, plaintiffs including the National Association of Diversity Officers in Higher Education filed a separate lawsuit in April 2026 challenging the EO on constitutional and ultra vires grounds.

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